Supply Chain Contracts Throughout Supply

Supply Chain Contracts

Contracts throughout supply chains are essential on a variety of levels for the partnerships and resulting network of buyers to succeed in attaining their shared objectives. First, contracts define and in fact quantify performance expectations (Rosenberg, 2007). Second, there are often both rewards for exceptional performance to shared metrics of performance and costs for not delivering on them (Coltman, Bru, Perm-Ajchariyawong, Devinney, Benito, 2009). Third, contracts define compliance of two parties to a shared agreement (Rosenberg, 2007). Fourth, contracts between suppliers and buyers are also often structured to allow for greater levels of collaboration and visibility into shared systems and processes as well, including quality management (Chao, Iravani, Savaskan, 2009). Add in to this the litigious nature of society today and the fact is that contracts and their management in supply chains is indispensible to any organization.

Determining the Value of Contracts

The area of Contract Lifecycle Management (CLM) (Rosenberg, 2007) includes the five essential steps in the definition and development of contracts and illustrates how suppliers work towards attaining joint value and risk reduction in their contracts. Contracts are in the most positive sense used for alleviating the risks associated with a lack of clear definition of expectations and the financial rewards of delivering exceptional performance. They can also be constrictive in that they define the costs and acceleration of damages for one party not fulfilling its part of a relationship. As a result of these factors, the five phases of CLM seek to create a high level of collaboration and coordination to mitigate risk. The five phases of the CLM are contract authoring and creation, contract negotiation and revision, contract approval, signature, and content archiving. Implicit in each of these steps is the need for also quantifying the value of each clause and condition in the contract as well (Rosenberg, 2007). This gives suppliers the ability to manage to quantified contract management requirements and often gain significant cost advantages as well. Being able to take advantage of more financially beneficial payment terms, in addition to coordinating on pricing changes with minimal interruption to shared risk and costs can be attained when a CLM-based strategy is in place within an organization. When contracts are the most critical is when there is a high degree of variably present in a supply chain as is the case with mass customization and Build-To-Order (BTO) (Smirnov, Shilov, Kashevnik, 2009).